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CHAPTER NO. 5

Instruments of Trade

and Investment Policiesand Trade Barriers

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Commercial Policies

A countrys commercial policies are thosedesigned to influence its trade relations with therest of the world.

Although international trade policy can beregarded as the result of opposing forces of freetrade and protection it is pertinent to mentionhere that in theory many countries adhere to thefree trade but in practice most have been

reluctant to engage in unrestricted free trade With this they are creating different types of

trade barriers to international trade.

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Trade Barriers to international Trade

and Investment

1. Tariff Barriers

2. Non-Tariff Barriers

3. Other Barriers1. Export restrictions

2. Barriers to Trade in services

3. Foreign investment controls

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Tariff Barriers

In simple terms, a tariff ( or customs duty) is a

tax imposed by a government on physical goods

as they move into or out of a country.

It has a similar effect as an indirect tax in that it

provides the government with a source of

revenue, while in creasing the price of the goods.

This means that the local producers are able toprice their goods just under the price of the

imported product

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Types of Tariff

There are two type of customs duties and the

third is combination of the two

Ad Valorem Duty

Specific Duty

Compound Duty

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Ad Valorem Duty

AV duty is stated in terms of a percentage of

the value of an imported article

For example 10% or 20% of the total value

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Specific Duty

Is expressed in terms of an amount of money

per quantity of goods

For example 10% per Kilo or Per Gallon

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Compound Duty

A combination of an AV Duty and a specific

duty is called a compound duty.

Whereas specific duties are based on factors

such as weight or quantity, ad valorem duties

are based on the value of the goods.

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Non-Tariff Barriers

While import tariffs were traditional trade

policy instruments, since the 1960

governments have increasingly resorted to a

variety of non-tariff measures to restrict

imports or subsidies export

These measures are collectively designated as

non-tariff trade barriers.

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Types of Non-Tariff Barriers

Quotas

International Cartels

Dumping Export Subsidies

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Quotas

Quotas or quantitative restrictions are the

most visible kind of non-tariff barrier.

Unlike tariffs, these restrictions impose

absolute limitations upon foreign trade and

inhibit market responses, which makes them

extremely effective.

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Types of Quotas

Unilateral Quotas

Negotiated Bilateral or Unilateral Quotas

Tariff Quotas Embargo

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Unilateral Quotas

These are fixed quotas that are adopted

without prior consultation or negotiation with

other countries.

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Negotiated Bilateral or Unilateral

Quota

Under this system, the importing country

negotiates with supplying countries, or with

groups of exporters in those countries, before

deciding the allotment of the quota bydefinite shares.

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Tariff Quotas

Under such a system a specified quantity of a

product is permitted to enter the country at a

given rate of duty or even duty free.

Any additional quantity that may be imported,

however, must pay a higher duty.

Thus Tariff Quotas combines the features of

both a tariff and a quota.

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Embargo

A particular type of quota that sets the limit at

zero imports is called an embargo.

Often an embargo is placed on imports for

clearly political reasons rather than to serve

any strictly economic.

For example US has had an embargo on

imports from Cuba since 1961

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International Cartels

An international Cartel is an organization ofsuppliers of a commodity located in differentnations (Or a Group of Government) that agreesto restrict output and exports of the commodity

with the aim of maximizing or increasing the totalprofits of a organization.

Although domestic cartels are illegal in the UnitedStates and restricted in Europe, the power of

international Cartels cannot easily be counteredbecause they do not fall under the jurisdiction ofany one nation.

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Examples includes

Most notorious of present day international

cartels is OPEC (Organization of Petroleum

Exporting Countries) which by restricting

production and exports succeeded in quadruplingthe price of crude oil between 1973 and 1974.

Another examples is the international Air

Transport Association, a cartel of majorinternational airlines that meets annually to set

international air fares and policies.

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Cartels success lies in

An international cartel is more likely tobe successful ifthere are only a few international suppliers of anessential commodity for which there are no closesubstitutes

Since the power of a Cartel lies in its ability to restrictoutput and exports, there is an incentive for any onesupplier to remain outside the cartel or to cheat on itby unrestricted sales at slightly below the cartel price.

Cartels are inherently unstable and often collapse orfail. If successful however a cartel could behave exactlyas a monopolist.

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Dumping

Dumping is the export of a commodity at

below cost or at least the sale of a commodity

at a lower price abroad than domestically.

Dumping describes the practice of selling a

product in one national market at a lower

price than it is sold in another national

market.

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Types of Dumping

Persistent Dumping

Predatory dumping

Sporadic/Specific Dumping

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Persistent Dumping

Persistent Dumping or international price

discrimination, is the continuous tendency of

a domestic monopolist to maximize total

profits by selling the commodity at a higherprice in the domestic market than

international market

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Predatory Dumping

Is the temporary sale of a commodity at a

below cost or at a lower price abroad in order

to drive foreign producers out of business,

after which prices are raised to take advantageof the newly acquired monopoly power

abroad.

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Sporadic/Specific Dumping

Specific Dumping is the occasional sale of

commodity at a below cost or at a lower price

abroad than domestically in order to unload

an unforeseen and temporary surplus of thecommodity without having to reduce

domestic prices.

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Trigger-Price Mechanism

In 1978 USA Govt. introduced a trigger-Price

mechanism under which a charge that steel was

being imported into the USA at lower price was

subject to a speedy antidumping investigating. If investigation was proved, the USA Govt. would

provide quick relief to the domestic steel industry

in the form of a duty that would bring the price ofthe imported steel equal to that of the lowest

cost country.

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Export Subsidies

Export Subsidies is the form of dumping.

Export subsidies are direct payments or the

granting of tax relief and subsidized loans to the

nations' exporters or potential exporters and low-interest loans to foreign buyers so as to stimulate

the nations exports.

Although export subsidies are illegal byinternational agreement, many nations provide

them in disguised and non-so-disguised forms

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Barriers to Service Trade

Services account for about 20% of world trade

and services trade has been growing more rapidly

than merchandise trade

Despite its higher growth rate, trade in services isseverely curtailed by non-tariff trade barriers.

Many developing countries have nationalized

insurance companies, give their state insuranceenterprises sole right to domestic insurance

business.

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Export Restrictions

Export controls may be in the form of bans or

embargoes, quantitative restrictions,

licensing, export taxes, minimum export

prices, and the reservation of exports todesignated trading entities.

Malaysia has a ban on the export of timber

logs presumably to encourage furtherprocessing within the country.

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Foreign Investment Controls

Foreign investment controls range from therejection of all foreign direct investment, to limitson the activities of foreign owned firms such aslimits on profit remittances and other financialcontrols.

Many governments, particularly in the developingcountries, promote import substitution by

imposing local content regulations on certainindustries (For example Malaysia in the carmaking sector)

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